The U.S.-China Rare Earth Mineral Fracas & Comparative Advantage
A few months ago China unleashed a global ruckus when it restricted exports of rare earth minerals – some 17 minerals used in high-tech products from cell phones and computers to electric cars and wind turbines. The storm seemed to have calmed until last week when Beijing announced that it would raise export tariffs on certain rare earths in 2011.
China’s clamping down on its rare earth mineral exports (or, now, making them more expensive) is problematic for the U.S. for two important reasons: 1) though China does not have the majority of the world’s remaining stores of raw rare earth minerals (it has about 30%), it currently produces about 97% of the world’s rare earth; and 2) rare earth mining and refining operations in the U.S. largely shut down over the last decades as mining and refining operations in China were so much less expensive (and environmental regulations more lax).
That transition of rare earth mining and refining operations from the U.S. to China reflects the typical development story: when a developing economy becomes able to do the same-quality work (or near to it) at a lower cost than the developed economy, that comparative advantage shifts.
Yes, that means job losses for workers in the more developed economy, but those short-term losses can be fixed by retraining those workers to higher-productivity jobs (productivity boosts are what keep advanced economies like America’s growing, after all). And it also means that consumers buy the goods we have come to love for much less – in this case cell phones and computers (and the kind of green technology that is likely the wave of the future).
FutureofUSChinaTrade.com Moderator Bob Mittelstaedt explores comparative advantage in his “Free Trade” scenario. He imagines a future where trade between the U.S. and China is truly free: the two countries compete on the basis of their comparative advantages – doing what they do best. He writes:
“Over the long-term, market flexibility – the ability of the education system to teach new skills, the ability of producers to produce different goods and services – is critical, because in a world with truly free trade comparative advantages constantly change. Those countries best able to adapt to those changes will grow the fastest. Everyone realizes economic gains, because they’re doing what they are best at and buying what they can’t produce most productively. It’s economic efficiency at its finest.”
Of course, when China imposes export taxes, restricts supply, or engages in other market-distorting tactics, it makes sense why users of rare earth minerals are concerned. So that begs the question, in an increasingly flat global world, where the natural movement is toward comparative advantage (produce and export what you’re best at, import the rest), does it ever make sense to resist that movement in order to maintain at least some domestic supply of critical goods?